Brazil: inflation nutters

Inflation nutters

Mervyn King, the former Governor of the Bank of England, referred to those central banks who focused solely on inflation targeting as "inflation nutters". They should take other things into account: growth, employment and so on. The central bank of Brazil, after its increase in interest rates to 15% is in the inflation nutter camp.

Brazil’s central bank was made independent as recently as February 2021. It set a great example to other economies in raising interest rates early in the 2021-2023 global tightening cycle. Notably, it started raising rates in March 2021, a year before the US Fed. By the time Brazilian consumer price inflation peaked at over 12% in April 2022, the policy interest rate had reached 11.75% and then went even higher (see chart). Interest rate cuts from mid-2023 to mid-2024 proved temporary, with a new tightening cycle taking rates to a peak of 15% between June 2025 and March 2026. The primary concern was that inflation risked staying above the target range (3% +/- 1.5%).

Nervousness about inflation is understandable. As recently as the 1990s, Brazil had two episodes of hyperinflation (over 5,000% p.a., a rate of 8% per day).

We are now in another - somewhat hesitant - easing cycle.  But, most likely, with interest rates at 14% and inflation now just in target (4.4% in July 2026) further rate reductions are likely. The IMF’s latest forecast sees inflation at 4.0% on average in in 2026, falling to 3.7% in 2027. It's impossible to say if 15% interest rates were needed to get there. But I very much doubt it.